Say you own a house. And your neighbor across the street owns a similar house. Heck, let’s just say the entire neighborhood is made up of similar homes.

Last weekend, the neighbor across the street sells her home for $150k. Zillow’s Zestimate also values everyone’s house at $150k – everyone, that is, except yours. Your home, although nearly identical, is inexplicably valued on Zillow for $50k. You’re confused, but it doesn’t really matter because you’re never going to sell it for $50k. When you go to sell, you’re going to get what every comparable home in your neighborhood gets. That’s how the real estate market works.

That’s how every (mostly) efficient market works. Eventually.

But in-between today and “eventually”, anomalies can pop up. And these anomalies create fantastic investment opportunities.

This past Sunday, Whiting Petroleum bid for Kodiak Oil & Gas (here). The market seems to love the all-stock deal, with the acquirer (WLL) up almost 8% yesterday.

The interesting thing about the target (KOG) is just how similar it is to LTS. They are both pure-plays on horizontal production, heavily weighted to oil, have similar production profiles, per-well economics, and cash flows. Take a look at just how alike they are:

After studying this table, you could make the argument that LTS is, in fact, more attractive than KOG. But for the purposes of this note, KOG is quite literally the neighbor across the street.

Let me repeat that: KOG is a near-perfect comp to LTS. And the deal announcement between WLL and KOG creates a near-perfect precedent transaction with which to value LTS.

So call me confused as I stare at the Grand Canyon-sized gap in valuation between KOG and LTS – it’s the functional equivalent of Zillow valuing your home at $50k when your neighbor just sold for $150k:

To reach KOG’s multiple, Lightstream’s stock would have to go up 3x (200% from here).

When a company doesn’t not make a profit it is not generating Cash, it is consuming Cash. When arm chair analysts tell you to focus on cash flow in the Canadian oil patch, run don’t walk in the opposite direction.

As for LTS, doing comp analysis is hardly analysis. Every well has different profitability characteristics and when you broad brush it you rarely have an apples to apples comparison. LTS is not a 3x based on what the reserves are worth.

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